Explain the term 'equilibrium' and demonstrate how a new equilibrium position is established when there is a decrease in demand for a good or service.

The term equilibrium describes the point at which supply and demand for a good or service meet to create an equilibrium price (E1) and an equilibrium quantity (Q1). The term equilibrium shows how the market has determined a price and quantity according to the demand and supply within a market, so the equilibirum is where supply meets demand. If there is a decrease in demand, the demand curve will shift inwards and result in a new equilibirum point. The new equilibrium creates a new equilibrium price (E2), which is lower than the original equilibrium price and there is a contraction along the supply curve. The fall in demand also results in a fall in the quantity demanded due to the fact that there are less suppliers also willing to supply the good at a lower price, so at the lower price the equilibrium quantity falls to Q2.  

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Answered by Megan H. Economics tutor

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